NEW: Wiz Nordberg

How to make money in Second Life? Today’s first of three posts is a primer on the SL economy and why people chase virtual profits.

Making money in Second Life, Part 1: Petty Cash

In many posts, I’ve provided unstructured comments and observations about the Second Life economy. But, I am often asked for money-making Second Life ideas, or to describe what the “formula” is for making money in Second Life. In response, I’ve decided that it would be good to give a structured overview of the Second Life economy, with a focus on how your business ideas can yield returns. It’s a big topic, so this will be a three-part post.

I’ve called this first instalment “Petty Cash” because the place to start is with in-world virtual businesses, virtual currency and the spending habits and psychology of Second Life consumers. For many real-life companies exploring Second Life, this is an area that is frequently overlooked. Why? Because virtual businesses deal in Linden dollars, worth about 267 to the US dollar. Virtual businesses usually trade in “objects” such as jewellery, furniture, or housing. I bought my house for $L350. Pretty good! A house for less than the cost of a real-life cappuccino!

To many real-life business people, the prospects of virtual profits in Linden dollars inspire yawns. Why bother worrying about making such minuscule fees for goods and services when you have a multi-million dollar business to run? Plus, setting up virtual businesses is hard, just as hard as real-life businesses. In addition, you need virtual property, building skills, and knowledge of Second Life marketing. Plus you need a product! Few real-life business people know much about a world in which one of the most sought after products is good skin to replace the one your avatar came with.

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But, as of July 1, Second Life is a world with a $L2.6 billion money supply, and where $US1.8 million was spent by residents yesterday, not on Linden Labs, but rather paying one another for goods and services. Yes, it’s true that if you do the numbers, and imagine your “share” of this market, the numbers are indeed small in real-life terms. Fewer than 150 Second Life residents make more than $US5000 a month. To most virtual businesses, those numbers aren’t realistic. And, even at the top of the heap, businesses such as anshechung.com, while profiting nicely, are still “small businesses”.

So why bother?

Starting a Second Life virtual business teaches a lot. First, Second Life is a “micro-transaction” world where, for most, the cost of sales is near zero because of market automation. This is an important new selling paradigm. It’s not like real-life where selling requires warehouses, packaging, and sales people. In Second Life, if you have a good product, you can use viral techniques to make sure everybody who has one can sell one to somebody else.

The “buy me” feature of every object is built into Second Life’s technology, and you can bet it will be fundamental in any future emerging virtual worlds’ technologies. If your product is in demand, all you need to do is put it in the right place and it sells itself without any further intervention. That’s why almost 40,000 residents are cash flow positive in Second Life. Starting a small business is easy and fun.

Because Second Life encourages such businesses, there is a definite “commercial” mentality among residents. The moment you make friends in Second Life, one big topic of conversation is always “our businesses”. And if you have an idea, knowledgeable residents will suggest you start a business yourself. It’s easy to find support because Second Life residents love commerce. They also embrace advertising and marketing schemes. The same “kids” that appear to be pirating music in the real world are holding out their change purses in Second Life making sure you pay for the home entertainment system you just bought from them.

In my next two posts, I’ll explore how to scale up businesses and address real-life opportunities, as well as talk about the Second Life boom services where a lot of people are making money now. However, starting a virtual business and understanding the consumer psychology in-world is vital. Those people will become your customers.

Before attempting any kind of Second Life business, start with a small “toy” business in Second Life. Consider it research. If you start with the basics of virtual business, you’ve got a knowledge advantage over competitors when you move on to the next steps. You’ll also find it’s tremendous fun, especially if you’re the type of person who like to build businesses, sell and market products.